Reference no: EM131283731

Each year, the World Economic Forum (WEF) releases competitiveness ratings for more than 100 countries. In its report for 2010-2011, Greece, Italy, Portugal, Spain, and Ireland rank lower than their EU neighbors in terms of infrastructure, business sophistication, macroeconomic environment, and other criteria. Little wonder then that these countries are sometimes referred to as the EU's "peripheral economies." Faced with huge budget deficits, Europe's leaders have been forced to introduce sweeping economic reforms. They have instituted unprecedented austerity measures in order rein in runaway government budgets.

Desperate to prop up economies teetering on the brink of collapse, EU's leadership devised a €750 billion rescue package. Greece A significant amount of the bailout money-€110 billion/$150 billion- was earmarked for Greece. Ranked 83rd in the WEF's Global Competitive Index, Greece has a long history of deep-rooted economic problems including tax evasion; a bloated, inefficient administration; and widespread corruption. Even so, after adopting the euro in 2001, Greece experienced an economic boom buoyed by positive trends in consumer spending and housing. However, the global financial crisis that began in 2008 hit Greece especially hard. As consumers and businesses in all parts of the world cut back on spending, Greek shipping companies lost business.

Then, in summer 2009, tourist traffic from Northern Europe-an important source of revenue-slowed considerably. Greece's budget deficit ballooned to 13.6 percent, far higher than the 3 percent limit mandated by the EU. Prime Minister George Papandreou had no choice but to impose tax increases, deep cuts in wages and pensions, and other austerity measures. Greek citizens responded with violent demonstrations, and workers went on strike.

As a condition for accepting the bailout package, Papandreou agreed that the European Commission, the International Monetary Fund, and the European Central Bank would be allowed to monitor Greece's economic reform program. In an effort to raise €50 billion ($71 billion) by 2015, the Greek government intends to sell governmentowned organizations and properties including the national post office and a telecommunications company. Italy Italy, ranked 48th in the WEF Global Competitiveness Index, is currently viewed as less "at risk" than Ireland and Portugal. In Italy, austerity is the order of the day. A three-year fiscal plan calls for €40 billion in budget cuts by 2014 to comply with euro zone rules. The government tends to have a balanced budget by 2014.

By that time it is hoped that Italy's debt-to-GDP ratio-currently second to Greece's-will fall from 120 percent to 112 percent. Unfortunately, Prime Minister Silvio Berlusconi's extravagant personal life, including well-publicized allegations of a sex scandal, have undermined public confidence in the government. Portugal Measured in terms of per capita GNI, Portugal is the poorest country in Western Europe; it ranks 46th in the WEF Index. In the darkest days of the financial crisis, Portugal's budget deficit was 9.3 percent of GDP. Portugal's foreign affairs minister noted that his country's debt situation might lead to its expulsion from the euro zone.

However, Prime Minister José Sócrates took decisive action; he froze the pay of public employees, reduced military spending, and postponed infrastructure projects. Commenting on the infrastructure issue, Fernando Ulrich, head of one of Portugal's top banks, said, "We cannot afford to invest any more money in cement for the next 10 years. We have to spend all our available funds on improving the competitiveness of the export sector." Spain Spain, the euro zone's fourth-largest economy, ranks 42nd in the Global Competitive Index. Its 20 percent unemployment rate is the highest in the EU; generous unemployment benefits reduce the incentive for individuals to find and keep jobs and cause a drain on public funds. Construction activity ground to a halt as overbuilding resulted in the bursting of the real-estate bubble.

Under pressure to initiate reforms, Prime Minister José Luis Rodríguez Zapatero has proposed changes to Spain's strict employment laws. Meanwhile, the Bank of Spain is moving to support cajas, regional savings banks that suffered huge losses in the housing market. Ireland Riding the wave of the technology boom of the late 1990s, Ireland's economy grew at an annual rate of 9.6 percent. The Celtic Tiger, as some called Ireland, was transformed into a preferred location for hightech manufacturing. Foreign direct investment represented two-thirds of overall GDP, far above the 20 percent average in the EU as a whole. The first decade of the twenty-first century was a dizzying time, as real estate prices soared.

Although Ireland is currently ranked 29th in terms of global competitiveness, the economic downturn has directly affected some of the Emerald Isle's oldest and most iconic brands. For example, citing falling global demand and the real estate bust, Guinness canceled plans to invest €650 million ($1 billion) to build a superbrewery on the site of its 250-year-old St. James's Gate facility. Waterford Wedgwood, the venerable crystal and fine-china company, entered insolvency administration and its owners put its assets up for sale.

Discussion Questions

1. Why are Greece, Ireland, Italy, Portugal, and Spain sometimes referred to as the euro zone's "peripheral countries"?

2. Why did the European Commission bail out banks in Ireland and Greece? Why not let them default?

3. Investors demand that Portugal's José Sócrates and other leaders make big spending cuts. However, Sócrates and other socialist prime ministers would prefer to generate economic growth via government spending. Does this make Sócrates, Zapatero, and like-minded leaders Keynesians? Or are they following Hayek's principles?

4. Why do citizens in France, Great Britain, and elsewhere stage protests when the government imposes austerity measures?